Amazon.com Inc. (AMZN) Stock Is Heavily Oversold. Should You Buy Now?

Amazon.com Inc. stock is down by over 10% from its peak. Languishing in the oversold zone, Is Amazon stock a good buy?

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Jeff Bezos led online retailing and cloud services giant Amazon (NASDAQ:AMZN) has been caught up in a pullback in the last few trading sessions. The Seattle, Washington-based e-commerce major disappointed investors with a 78% earnings drop in the latest quarter. And, well the market has been pretty unforgiving. Amazon stock is down by over 11% from its all time highs of $1083, which was the price at which the stock had changed hands a day ahead of the latest earnings announcement. Should investors buy into this dip, which is the first meaningful correction for Amazon stock in the last one year?

Amazon Stock Has A History Of Defying Conventional 'Wisdom'

Amazon has a history of defying traditional investment theories. As a company which barely had anything to show in terms of profitability, Amazon's rise through the last decade had defied a popular Wall Street adage, "Earnings are the “Mother's Milk” of stock prices." Leaving aside the last couple of years, Amazon was unable to break even with any sort of consistency, going from break-even/marginal to huge losses from one-quarter to another.

And how did the stock fare? The rise of Amazon stock price has been the stuff of legends, with each dollar invested in the Amazon IPO today being worth more than $640. To put it another way, Amazon has been a money spinner for the investors, without ever moving the needle on the bottom line. Given this context, it's hard to believe that the market is finally punishing the company for a 'lack of earnings.'

Profit Booking And Trump Pushing Amazon Stock Lower?

So, what exactly is driving the correction in Amazon stock price? It's not too hard to figure out. Firstly, as is well known by most followers of Amazon stock, President Trump isn't exactly 'fond' of Amazon. At least not in a nice way. The man in the White House was at it again, when he recently tweeted that Amazon causes job losses.

Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt - many jobs being lost!

The result? Amazon stock opened the August 16 trading session at $981 a share and closed the last trading session at the $960 level. Is the market reading a bit too much into what President Trump is saying? If yes, then this isn't the first time the US president has attacked the e-commerce giant. To put things in context, Amazon stock is up nearly 22% since Donald Trump won the election, beating the 19.8% rise in the Nasdaq Composite (INDEX:COMPX) and the 13.6% gain in the S&P 500 (INDEX:SPAL). So, if you are worried about how Amazon will fare under this administration, don't stress. Amazon will do just fine.

The second factor which could be driving the fall in Amazon stock price is profit booking. And, it's not hard to understand why. Amazon stock, at its pre-earnings peak of $1083 was up 33% year-to-date, and its only natural that some long term investors would be seeking to take some money off the table. Hence, the recent correction in Amazon stock is mostly attributable to temporary factors and not really causes for concerns in the long term. This brings us to the next question: Is Amazon stock a good buy now?

Amazon Stock is heavily oversold

The Amazon stock technical chart is flashing multiple encouraging signs. As we had covered in our "Top crossover trades for today', Amazon stock price is testing its 100-day simple moving average, a support line the stock hasn't breached even once in 2017. In addition to the strong support from the 100-day SMA, Amazon stock has also entered the oversold territory, as per the RSI (Relative Strength Index) indicator. The RSI reading for Amazon is currently 28.72, well below the oversold threshold of 30. To put it another way, Amazon stock could have bottomed out for now. The oversold signal is also supported by another popular technical tool; Bollinger Bands. Amazon stock price is currently trading close to the lower Bollinger band, which implies that a move higher could be just around the corner.

To sum up, Amazon stock price has been caught up in a correction following its latest earnings release. Just when it looked like the stock had bounced off the 100-day SMA, president Trump's comments sent the stock further lower to test the 100-day SMA once again. Given the over 11% drop in Amazon stock price from its pre-earnings peak, it's likely that most of the weak hands (booking profits) have exited the stock. Supported by encouraging technical signals, Amazon stock might have bottomed out for now. Hence, long term investors should use this dip to accumulate Amazon shares on the cheap.

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